Preparing for a global economic restructuring

Other than deepening ties with the U.S. and diversifying trade partners, what can Canada do to prepare for the unpredictability of the future? Ottawa's options are limited, largely due to the divisions between federal and provincial jurisdictions.

Zach Paikin is a frequent media commentator on public policy issues and Canadian political affairs. He also contributes research on international affairs to several Washington-based think tanks and institutes. He was a candidate for National Policy Chair of the Liberal Party of Canada at the party’s 2012 biennial convention. Originally from Toronto, Zach now resides in Montreal.

In my last column, the stage was set for what will have to be the government’s response to unpredictable revenue derived from the export of oil.

The best case scenario Canada could likely hope for is one in which the price of oil “disinflates” (i.e., slowed increases). With significant unconventional reserves located in the United States, China, Israel and elsewhere and with growing economic giants likely to spark higher demand, it would be foolish for Canada to count on the international regime for oil currently in place.

It should be noted as well that the extraction and export of oil shale may be pursued not only for economic reasons but also for geopolitical ones. In the case of oil, traditional logic stipulates that supply follows demand, causing inflation as well as excess capacity. However, take for example the case of Israel. Taking oil shale into account, there is just as much oil located in Israel — if not more — than there is in Saudi Arabia.

Jerusalem may well choose to develop and export its oil merely for the purpose of attempting to brake OPEC’s near-monopoly over the international oil market and damage the non-diversified economies of other Middle-Eastern states, perhaps naively. If Israel can find export markets that are willing to purchase, the incentives for such a move appear great. As stated last week, production costs for Israel’s oil shale represent merely one-third of the current price of oil.

Other than deepening ties with the United States and diversifying trade partners, what can Canada do to prepare for the unpredictability of the future? Ottawa’s options are limited, largely due to the divisions between federal and provincial jurisdictions. However, if the following initiatives succeed, the advantages for Canada over the long run are significant.

One sector in which federal and provincial jurisdictions may overlap is post-secondary education. Although education is generally viewed as being a provincial responsibility, we saw the federal Liberal Party offer students grants to increase accessibility to post-secondary education. If there is significant cooperation between the feds and the provinces on this file, we could see Ottawa deal with the financial issues plaguing student accessibility to post-secondary school while the provinces find ways to provide incentives to universities to direct their funds toward departments that satisfy our economic needs.

If properly coordinated, the result would be a continuous flow of competitive young people into the workforce and a reduction of unemployment over the long run. Of course, there are other obstacles to post-secondary education besides financial concerns — social issues and unequal quality in secondary education — and these issues could be addressed by either or both levels of government as well.

A second issue plaguing the Canadian economy is the failure to produce additional labour and capital mobility, the former stemming from a population that is too specialized in particular skills and the latter emanating from the presence of significant barriers to interprovincial trade. If certain portions of the population largely possess only one skill — take auto workers, for instance — then bailouts become a necessity when the related industries go bankrupt. And if capital can’t flow freely, then certain regions find themselves competing with the world’s emerging economies while others (such as those with abundant natural resources) remain able merely to serve them. The result of this is growing regional inequality within Canada.

Diversifying the skills of our population must be on the radar when it comes to pursuing proper education and immigration policy. Reducing barriers to interprovincial trade is a clear necessity, so long as it is coupled with tax policy that incentivizes alternative energy production and with a plan to provide R&D firms with a greater ability to administer government programs related to the promotion of economically-viable transfers of technology. These steps will help create a Canadian economy that is both more unified and more open to the world.

Acting in the national interest does not necessarily require throwing more government money at the problem. At times, the best solution is to either guide the private sector through creative policy or quite simply get out of the way. Canada already spends more per capita on research and development than nearly all OECD countries — a whopping $7 billion per annum — yet gets little in return commercially.

Of course, all the above policies don’t take away from the fact that even more radical change is in order when it comes to dealing with our country’s impending demographic crisis. Public service reform, immigration increases and reform, fertility increases, productivity increases and more will all be required over the long run.

What the aforementioned suggestions would demonstrate if implemented, however, is that Canada clearly understands that the global economy is undergoing a fundamental restructuring. Part of that restructuring is the creation bit-by-bit of a world in which fossil fuels play a role, but do not enjoy a monopoly on energy resources. Stephen Harper’s government would be wise to abandon its “watertight compartments” view of Canadian federalism and get the provinces onside before it’s too late.

Follow Zach on Twitter at @zpaikin. Click here to view a list of all columns by Zach Paikin.

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